AIG Joining Greenberg Suit Against U.S. Seen as Hard Sell

Jan. 8 (Bloomberg) -- American International Group Inc.,
the insurer that’s weighing whether to join a shareholder suit
alleging its 2008 bailout was unconstitutional, would face tough
odds in court, a former government watchdog said.

AIG’s board is scheduled to meet tomorrow to review whether
it should join a case brought in 2011 by former Chief Executive
Officer Maurice “Hank” Greenberg. The ex-CEO said that the
rescue cheated shareholders by diluting their stake in the
company. The insurer needed help after it was unable to raise
money in equity and bond markets to pay clients who had bought
protection against losses on mortgage-related securities.

“The idea that AIG would have been better off by going
bankrupt, for the shareholders is a very, very hard thing to
sell, I think, to a judge,” Neil Barofsky, the former inspector
general of the U.S. Troubled Asset Relief Program said today on
Bloomberg Television. “I just don’t see how you get past the
fact the board voted” to accept U.S. aid.

The lawsuit presents both legal and public-relations
challenges for a company that repaid the remainder of a $182.3
billion bailout last year. The New York-based insurer last week
began an advertising campaign to thank taxpayers for their
support and highlight that the U.S. made a profit on the rescue.

AIG said in court papers in August that Greenberg’s Starr
International Co. may file a complaint against the company if it
doesn’t join the case. The New York Times reported on the board
meeting yesterday, saying that directors may have an obligation
to shareholders to consider the possibility of recovering money
through a lawsuit.

‘Informed Judgment’

“They have to show they made an informed judgment,”
Charles Elson, a corporate-governance professor at the
University of Delaware, said of the board. If they decide not to
join the lawsuit, they would likely be protected by the so-called business-judgment rule, which shields corporate officers
as well as directors from lawsuits over their decisions made on
behalf of the corporation, he said.

AIG’s board will review presentations by the U.S. Treasury
Department, Federal Reserve Bank of New York and Starr as
directors work toward a decision by the end of this month,
according to the court filing from August. While the board has a
responsibility to hear the arguments, joining the case would
invite outrage from the public, said Barofsky.

Barofsky said he doesn’t expect AIG to “turn around and
give the American taxpayer the equivalent of a giant middle
finger of suing them for saving them,” Barofsky told Bloomberg
Television’s Erik Schatzker and Stephanie Ruhle, referring to an
insulting and obscene gesture in the U.S.

‘Worthless Stock’

White House press secretary Jay Carney said at a briefing
today that he hadn’t discussed the lawsuit with President Barack
Obama and that the government rescued AIG “after concluding
that such a failure would have caused catastrophic damage to the
economy and financial system.”

“There is no merit to these allegations,” Jack Gutt, a
New York Fed spokesman wrote in an e-mailed statement. “AIG’s
board of directors had an alternative choice to borrowing from
the Federal Reserve and that choice was bankruptcy.”

The latter option would have left shareholders with
“worthless stock,” Gutt said. AIG’s shares tumbled more than
90 percent in 2008. After the bailout, the company approved a
20-for-1 reverse stock split to buoy the share price. The
insurer fell 0.8 percent to $35.65 at 4:01 p.m. in New York.

‘Negative Publicity’

“While boards have a duty to their shareholders, they must
also weigh the potential public relations fallout and negative
publicity associated with these types of decisions, which could
also prove detrimental to shareholders,” Brian Lee, a managing
director at CEB, an advisory firm that works with corporations
on governance issues, said in an e-mail.

Greenberg won a federal judge’s approval to proceed with
the case against the U.S. in July. In the complaint, Starr said
the government paid $500,000 for a stake in the company that was
worth $25 billion, violating the constitutional rights of
shareholders to due process and equal protection of the law. A
parallel case against the New York Fed was dismissed in
November.

“AIG should thank American taxpayers for their help, not
bite the hand that fed them for helping them out in a crisis,”
said Senator Elizabeth Warren, a Massachusetts Democrat, in an
e-mailed statement. Warren previously led a congressional panel
that reviewed federal bailouts of financial firms.

The U.S. converted its preferred stake in AIG into 92
percent of the company’s common shares in 2011. The holding was
sold in six share sales over the last two years.

“If AIG enters this suit, it would be the equivalent of a
patient suing their doctor for saving their life,” said Mark
Williams, a former Federal Reserve bank examiner who teaches
finance at Boston University.

The case is Starr International Co. v. U.S., 1:11-cv-00779,
U.S. Court of Federal Claims (Washington).